No Crowdfunding, Not Yet

The Nevada Secretary of State just today issued a press release warning businesses about crowdfunding. Simply stated, crowdfunding describes the method by which an organization can raise money from a pool of contributors, each of whom pony up a small amount of dough, often through crowdfunding sites on the internet. Small businesses are excited about this idea because current securities* laws make it incredibly difficult for small businesses to raise money because they require a whole host of legal documents that really only lawyers can prepare. Not just any lawyer, either. You really need a securities lawyer to handle this type of thing and, because their malpractice insurance premiums are so high for this area of law, the work doesn’t come cheap.

Small businesses across the country hope that the Crowdfunding Act that was signed into law earlier this year will mean they don’t have to jump through all those expensive hoops to raise money for their businesses. However, the SEC (Securities and Exchange Commission) has not yet figured out what the rules are.

What does that mean? Crowdfunding for securities that aren’t registered through the traditional (read: expensive) methods as of this moment is NOT LEGAL.

You have been warned.

*What is a security? A security is an ownership interest in a business entity, whether it be an LLC or a corporation. So, if you’re looking to raise money for your business by selling off a portion of the ownership to someone else, you’re selling a security and need to make sure you comply with state and federal securities laws. I’ve spoken with securities lawyers about this topic and I’m not going to sugarcoat it – it’s complex. To do it properly takes a significant amount of expertise and a decent sum in attorney fees.

One Comment

Kickstarter crowdsources funding for projects. They had to write a specific Blog article about donators treating it like they were shopping for new products. They said creators must talk about the “risks and challenges” because there’s no guarantee the project will finish (and it’ll pay off). Here’s their Blog article: http://www.kickstarter.com/blog/kickstarter-is-not-a-store